by Kiki Verico
One of the most important variables in emerging economies like Indonesia is the stability of the exchange rate. Unstable exchange rates make it almost impossible for business ventures to plan their businesses. The higher the depreciation of the Rupiah, the higher the inflation rate, and this will decrease people’s purchasing power. In the balance of payments, the stability of the exchange rate and capital account are strongly influenced by the current account balance. A study found that in Indonesia, in the long run (Johansen Procedure) Indonesia’s current account balance affects its real exchange rate, while in the short run (VECM) it affects the nominal exchange rate. The study also found that in the current account balance, the factor affecting the exchange rate is the trade balance. Indonesia’s trade balance relies on a surplus of trade in goods, especially agricultural products, petroleum and gas. The price of products in the primary sector is very vulnerable because of the volatility of primary products as a result of the world’s oil and gas price. Indonesia’s current account balance is highly dependent on manufacturing products’ trade. Another study found that in practice, manufacturing trade influences capital flows, rather than vice versa. Therefore, in order to maintain a positive long-term economic growth and stable exchange rate, Indonesia must increase its trade competitiveness, especially in the manufacturing sector. This paper will explore the challenges and opportunities of international trade in Indonesia towards 2030 and afterwards.